UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-Q

 

 

Commission file number: 1-11397

 

 

 

 

Valeant Pharmaceuticals International

(Exact name of registrant as specified in its charter)

 

 

(949) 461-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of outstanding shares of the registrant’s Common Stock, $0.01 par value, as of May 1, 2008 was 89,291,967.

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

INDEX

 

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 2008 and December 31, 2007
(In thousands, except par value data)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands, except per share data)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

March 31, 2008

(Unaudited)

 

In the consolidated condensed financial statements included herein, “we,” “us,” “our,” “Valeant,” and the “Company” refer to Valeant Pharmaceuticals International and its subsidiaries. The condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared on the basis of accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The results of operations presented herein are not necessarily indicative of the results to be expected for a full year. Although we believe that all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2007.

 

 

Organization:  We are a multinational pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Additionally, we generate royalty revenues from the sale of ribavirin by Schering-Plough Ltd. (“Schering-Plough”).

 

Principles of Consolidation:  The accompanying consolidated condensed financial statements include the accounts of Valeant Pharmaceuticals International, its wholly owned subsidiaries and its majority-owned subsidiary in Poland. All significant intercompany account balances and transactions have been eliminated.

 

Marketable Securities:  Marketable securities include short-term commercial paper and government agency securities which, at the time of purchase, have maturities of greater than three months. Marketable securities are generally categorized as held-to-maturity and are thus carried at amortized cost, because we have both the intent and the ability to hold these investments until they mature. As of March 31, 2008 and December 31, 2007, the fair value of our marketable securities approximated cost.

 

Derivative Financial Instruments:  Our accounting policies for derivative instruments are based on whether they meet our criteria for designation as hedging transactions, either as cash flow, net investment or fair value hedges. Our derivative instruments are recorded at fair value and are included in other current assets, other assets, accrued liabilities or debt. Depending on the nature of the hedge, changes in the fair value of the hedged item are either offset against the change in the fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.

 

Comprehensive Income:  We have adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income. Accumulated other comprehensive income consists of accumulated foreign currency translation adjustments, unrealized losses on marketable equity securities, pension funded status and changes in the fair value of derivative financial instruments.

 

Per Share Information:  Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. In computing diluted earnings per share, the weighted-average number of common shares outstanding is adjusted to reflect the effect of potentially dilutive securities including options, warrants, and convertible debt; income available to common stockholders is adjusted to reflect any changes in income or loss that would result from the issuance of the dilutive common shares.

 

Stock-Based Compensation Expense:  We have adopted SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases under our Employee Stock Purchase Plan based on estimated fair values. In order to estimate the fair value of stock options, we use the Black-Scholes option valuation model, which was developed for use in estimating the fair value

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

of publicly traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of subjective assumptions which can vary over time.

 

Assets Held for Sale:  We have classified certain assets as assets held for sale in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). At December 31, 2007, assets held for sale included the assets related to our Infergen operations and the assets included in the sale of certain business subsidiaries and assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”). We sold the assets related to our Infergen operations to Three Rivers Pharmaceuticals, LLC on January 14, 2008. We completed the transaction with Invida on March 3, 2008. At March 31, 2008, assets held for sale included the assets of our subsidiaries in Argentina and Uruguay, which we have decided to sell.

 

Discontinued Operations:  The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS 144. The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented. More details on discontinued operations are available in Note 5.

 

Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

 

Recent Accounting Pronouncements:

 

SFAS No. 157.  In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not change the requirements to apply fair value in existing accounting standards. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability. SFAS 157 became effective for Valeant as of January 1, 2008. For more details about our implementation of SFAS 157, see Note 3.

 

SFAS No. 159.  In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”) which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not eliminate any disclosure requirements included in other accounting standards. SFAS 159 permitted us to choose to measure many financial instruments and certain other items at fair value and established presentation and disclosure requirements. In adopting SFAS 159, we did not elect to measure any new assets or liabilities at their respective fair values.

 

The implementation of SFAS 159 did not have a material effect on our financial statements as we did not elect the fair value option for any financial instruments or other assets and liabilities.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Among other requirements, SFAS 141(R) expands the

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

definition of a business combination, requires acquisitions to be accounted for at fair value, and requires transaction costs and restructuring charges to be expensed. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. When implemented, SFAS 141(R) will require that any reduction to a valuation allowance established in purchase accounting will be accounted for as a reduction to income tax expense, rather than a reduction of goodwill.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial statements.

 

In December 2007, the FASB ratified the consensus reached by the EITF in EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all prior periods presented is required for all collaborative arrangements existing as of the effective date. We do not expect the adoption of EITF 07-1 to have a material impact on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This standard becomes effective for Valeant on January 1, 2009. Earlier adoption of SFAS 161 and, separately, comparative disclosures for earlier periods at initial adoption are encouraged. As SFAS 161 only requires enhanced disclosures, this standard will have no impact on our financial statements.

 

FASB Proposed Statement of Position APB 14-a (not yet implemented).  In August 2007, the FASB issued for comment FASB Statement of Position APB 14-a (“FSP APB 14-a”) for a comment period that ended in October 2007. If the proposed FSP APB 14-a is implemented, it would require the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The proposed FSP APB 14-a would be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance in the proposed FSP APB 14-a would be applied retrospectively to all periods presented. If this proposal is implemented as currently drafted, it will materially increase our reported interest expense.

 

 

2008 Restructuring

 

In October 2007, our board of directors initiated a strategic review of our business direction, geographic operations, product portfolio, growth opportunities and acquisition strategy. As announced on March 27, 2008, we have completed this strategic review and announced a strategic plan which will include a restructuring program (the “2008 Restructuring”). The 2008 Restructuring is expected to reduce our geographic footprint and product focus by restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

United States, Mexico, Canada, Brazil and Australia. We are pursuing plans to divest our operations in markets outside of these core geographic areas through sales of subsidiaries, assets or other strategic alternatives, to seek partners for taribavirin and retigabine and to make selective acquisitions.

 

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell Invida certain Valeant subsidiaries and product rights in Asia, in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with SFAS 144. We received initial proceeds of $37,855,000 and recorded a gain of $36,923,000 in this transaction. We expect to receive additional proceeds in 2008 of approximately $5,585,000 as a purchase price adjustment relating to net asset value.

 

As of March 31, 2008, we classified our subsidiaries in Argentina and Uruguay as “held for sale” in accordance with SFAS 144. We are negotiating the sale of these subsidiaries, which we expect to close in 2008. In the three months ended March 31, 2008, we recorded an impairment charge of $7,853,000 related to this sale.

 

The net restructuring, asset impairments and dispositions benefit of $12,664,000 in the three months ended March 31, 2008 resulted from the gain of $36,923,000 in the transaction with Invida, offset in part by restructuring charges of $24,259,000. Restructuring charges incurred in the three months ended March 31, 2008 included severance costs of $6,742,000, contract cancellation and other cash costs of $3,536,000, cash charges from the Invida transaction of $1,350,000, a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4,778,000 and an impairment charge of $7,853,000 related to the planned sale of our subsidiaries in Argentina and Uruguay. The severance charges recorded in the 2008 Restructuring as of March 31, 2008 were primarily for our former chief executive officer and six other executives. The charges taken in 2007 for this 2008 Restructuring included $957,000 for executive severances, $4,677,000 for professional service expenses and $3,967,000 for contract termination and transaction costs associated with the sale of our Asia businesses to Invida.

 

2006 Restructuring

 

On April 3, 2006, we announced a restructuring program (the “2006 Restructuring”) which was primarily focused on our research and development and manufacturing operations. The objective of the restructuring program as it related to research and development activities was to focus our efforts and expenditures on retigabine and taribavirin, our two late stage projects in development. The restructuring program was designed to rationalize our investments in research and development efforts in line with our financial resources. In December 2006 we sold our HIV and cancer development programs and certain discovery and pre-clinical assets to Ardea Biosciences, Inc. (“Ardea”), with an option for us to reacquire rights to commercialize the HIV program outside of the United States and Canada upon Ardea’s completion of Phase 2b trials. In March 2007, we sold our former headquarters building in Costa Mesa, California, where our former research laboratories were located, for net proceeds of $36,758,000.

 

In the three months ended March 31, 2007, we recorded a charge of $7,238,000 related to the 2006 Restructuring. Severance charges recorded in the three months ended March 31, 2007 for employees whose positions were eliminated in the restructuring totaled $3,781,000. The charge in the three months ended March 31, 2007 included $2,050,000 related to 202 employees at our former manufacturing facility in Humacao, Puerto Rico and $895,000 related to 10 employees in our sales and marketing operations in Spain.

 

The objective of the 2006 Restructuring as it related to manufacturing was to further rationalize our manufacturing operations to reflect the regional nature of our existing products and further reduce our excess capacity after considering the delay in the development of taribavirin. The impairment charges included the charges related to estimated future losses expected upon the disposition of specific assets related to our manufacturing operations in Switzerland and Puerto Rico. We completed the 2006 Restructuring in June 2007 with the sale of our

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

former manufacturing facilities in Humacao, Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals International.

 

The following table summarizes the restructuring costs recorded in the three months ended March 31, 2008 and March 31, 2007 (in thousands):

 

 

 

The $24,259,000 restructuring charge for the three months ended March 31, 2008 represent charges of $13,643,000, $9,956,000, $526,000, and $134,000 in the Corporate division and the International, EMEA, and North America segments, respectively. The restructuring charges for the three months ended March 31, 2007 represent charges of $3,042,000, $2,177,000 and $2,019,000 in respect of the North America and EMEA segments and the Corporate division, respectively.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

Reconciliation of Cash Restructuring Payments with Restructuring Accrual

 

Cash-related charges in the above table relate to severance payments and other costs which have been either paid with cash expenditures or have been accrued and will be paid with cash in future quarters. The $3,766,000 restructuring accrual for the 2006 Restructuring, accrued as of March 31, 2008, relates to ongoing contractual payments to Legacy Pharmaceuticals International relating to the sale of our former sites in Basel, Switzerland and Puerto Rico. These payment obligations last until June 30, 2009. A summary of accruals and expenditures of restructuring costs which will be paid in cash is as follows (in thousands):

 

2006 Restructuring: Reconciliation of Cash Payments and Accruals

 

 

2008 Restructuring: Reconciliation of Cash Payments and Accruals

 

 

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not change the requirements to apply fair value in existing accounting standards. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

 

Relative to SFAS 157, the FASB issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases, (“SFAS 13”) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

 

We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing and those initially measured at fair value in a business combination. We are currently assessing the impact SFAS 157 will have on such nonfinancial assets and liabilities.

 

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.

 

Level 1 — Quoted market prices in active markets for identical assets or liabilities.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

Level 2 — Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.

 

Level 3 — Unobservable inputs that are not corroborated by market data.

 

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2008 (in thousands):

 

 

Available for sale securities are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. Derivative contracts used as hedges are valued based on observable inputs such as changes in interest rates and currency fluctuations and are classified within Level 2 of the valuation hierarchy.

 

For a derivative instrument in an asset position, we analyze the credit standing of the counterparty and factor it into the fair value measurement. SFAS 157 states that the fair value measurement of a liability must reflect the nonperformance risk of the reporting entity. Therefore, the impact of our creditworthiness has also been factored into the fair value measurement of the derivative instruments in a liability position.

 

 

In the three months ended March 31, 2008, we acquired product rights in Poland for $504,000 in cash and $407,000 in other consideration. In the three months ended March 31, 2007, we acquired product rights in the United States, Europe and Argentina. In the United States we acquired a paid-up license to Kinetin and Zeatin, the active ingredients of Kinerase, for cash consideration of $21,000,000 and other consideration of $4,170,000. In Europe, we acquired the rights to Nabilone, the product we currently market as Cesamet in the United States and Canada, for $9,659,000. We acquired the rights to two products in Poland and certain products in Argentina. The aggregate cash consideration for these transactions was $31,325,000.

 

 

In September 2007, we decided to divest our Infergen product rights. The results of the Infergen operations and the related financial position have been reflected as discontinued operations in the consolidated financial statements in accordance with SFAS 144. The consolidated financial statements have been reclassified to conform to discontinued operations presentation for all historical periods presented.

 

We sold these Infergen rights to Three Rivers Pharmaceuticals, LLC on January 14, 2008. We received $70,800,000 as the initial payment for our Infergen product rights, with additional payments due of up to $20,500,000. We recorded a net gain in this transaction of $27,566,000 after deducting the carrying value of the net assets sold from the proceeds received.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

In the three months ended March 31, 2008 and 2007, the results from discontinued operations primarily related to Infergen and are summarized as follows (in thousands):

 

 

The disposal of discontinued operations, net in the three months ended March 31, 2008 includes an income tax charge of $4,152,000.

 

The assets and liabilities of discontinued operations are stated separately as of March 31, 2008 and December 31, 2007 on the accompanying consolidated condensed balance sheets. The major assets and liabilities categories are as follows (in thousands):

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

 

For the three months ended March 31, 2008, options to purchase 479,744 weighted average shares of common stock were not included in the computation of earnings per share because we incurred a loss in continuing operations and the effect would have been anti-dilutive.

 

For the three months ended March 31, 2008 and 2007, options to purchase 9,182,000 and 9,659,000 weighted average shares of common stock, respectively, were also not included in the computation of earnings per share because the option exercise prices were greater than the average market price of our common stock and, therefore, the effect would have been anti-dilutive.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

 

The following tables present the details of certain amounts included in the consolidated balance sheet at March 31, 2008 and December 31, 2007 (in thousands):

 

 

The increase in other receivables includes receivables of $7,000,000 and $5,585,000 related to the transactions with Three Rivers Pharmaceuticals, LLC and Invida, respectively, offset by reductions in certain other receivables.

 

Other assets was $49,414,000 as of March 31, 2008, an increase of $14,071,000 from $35,343,000, reported as of December 31, 2007. This increase primarily related to the $11,006,000 receivable from Three Rivers Pharmaceuticals, LLC and the $3,728,000 increase in the value of the interest rate swap.

 

Intangible assets:  As of March 31, 2008 and December 31, 2007, intangible assets were as follows (in thousands, except life data):

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

Estimated future amortization expenses are as follows (in thousands):

 

 

Amortization expense for the three months ended March 31, 2008 and 2007 was $18,066,000 and $17,481,000, respectively, of which $15,702,000 and $14,646,000, respectively, related to amortization of acquired product rights.

 

 

We incur losses in the United States, where our research and development activities are conducted and our corporate offices are located. We anticipate that we will realize the tax benefits associated with these losses by offsetting such losses against future taxable income resulting from products in our development pipeline, further growth in US product sales and other measures. However, at this time, there is insufficient objective evidence of the timing and amounts of such future U.S. taxable income to assure realization of the tax benefits, and valuation allowances have been established to reserve those benefits. The increase in the valuation allowance for the three months ended March 31, 2008 was $4,300,000. Our effective tax rate for the three months ended March 31, 2008 was affected by pre-tax losses resulting from restructuring and impairment charges of $8,001,000 in Argentina for which we do not expect to realize income tax benefits, and pre-tax income resulting from restructuring associated with the sale of assets in Asia of $8,962,000 which we do not expect to be subject to tax in certain jurisdictions. A provision for income taxes of $7,651,000 was recorded for this period which primarily represents the taxes payable on earnings in tax jurisdictions outside the United States and interest on uncertain tax positions.

 

During the quarter ended March 31, 2008, we recorded a net pre-tax gain from discontinued operations from the sale of our Infergen product line in the United States. This gain was considered in determining the amount of income tax benefit to be allocated to current year losses from continuing operations in the United States. As a result, we recorded income tax expense of $4,152,000 in discontinued operations in the quarter ended March 31, 2008 and this same amount will be recorded as an income tax benefit in continuing operations for the full year 2008. Of this amount, $1,610,000 was included in the provision for income taxes in continuing operations for the quarter ended March 31, 2008 based on an allocation of the full year impact to the quarter.

 

At March 31, 2008 we had $120,406,000 of unrecognized tax benefits (FIN 48), of which $6,093,000 would reduce our effective tax rate, if recognized. Of the total unrecognized tax benefits, $24,173,000 was recorded as an offset against a valuation allowance. To the extent such portion of unrecognized tax benefits is recognized at a time when a valuation allowance no longer exists, the recognition would affect our tax rate. Based on current discussions with the IRS, we believe it is reasonably possible that $40,764,000 of unrecognized tax benefits will be reversed within the next twelve months. We also believe that it is reasonably possible that non-U.S. unrecognized tax benefits of $313,000 will reverse within the next twelve months.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2008, we had recorded $8,622,000 for interest and $2,139,000 for penalties. We accrued additional $462,000 of interest during the quarter ended March 31, 2008.

 

We are currently under audit by the IRS for the 2005 and 2006 tax years. We are appealing adjustments that were proposed during the audit of the 2002 through 2004 tax years in the U.S. All years prior to 1997 are closed under the statute in the U.S. Our significant subsidiaries are open to tax examinations for years ending in 2001 and later.

 

 

We apply SFAS 123(R), Share-Based Payment which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. A summary of stock compensation expense for our stock incentive plans is presented below (in thousands):

 

 

Dividends:  We did not pay dividends for either the first quarter of 2008 or the first quarter of 2007.

 

 

We are involved in several legal proceedings, including the following matters (Valeant was formerly known as ICN Pharmaceuticals, Inc.):

 

Securities Class Actions:

 

SEC Investigation:  We are the subject of a Formal Order of Investigation with respect to events and circumstances surrounding trading in our common stock, the public release of data from our first pivotal Phase III trial for taribavirin, statements made in connection with the public release of data and matters regarding our stock option grants since January 1, 2000 and our restatement of certain historical financial statements announced in March 2008. In September 2006, our board of directors established a Special Committee to review our historical stock option practices and related accounting, and informed the SEC of these efforts. We have cooperated fully and will continue to cooperate with the SEC in its investigation. We cannot predict the outcome of the investigation.

 

Derivative Actions Related to Stock Options:  We are a nominal defendant in two shareholder derivative lawsuits pending in state court in Orange County, California, styled (i) Michael Pronko v. Timothy C. Tyson et al., and (ii) Kenneth Lawson v. Timothy C. Tyson et al. These lawsuits, which were filed on October 27, 2006 and November 16, 2006, respectively, purport to assert derivative claims on our behalf against certain of our current and/or former officers and directors. The lawsuits assert claims for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and violations of the California Corporations Code related to the purported backdating of employee stock options. The plaintiffs seek, among other things, damages, an accounting, the rescission of stock options, and a constructive trust over amounts acquired by the defendants who have exercised Valeant stock options. On January 16, 2007, the court issued an order consolidating the two cases before Judge Ronald L. Bauer. On February 6, 2007, the court issued a further order abating the Lawson action due

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

to a procedural defect while the Pronko action proceeds to conclusion. The plaintiff in the Pronko action filed an amended complaint on February 6, 2008, which dismissed claims against eighteen defendants. The remaining defendants moved to dismiss the amended complaint on March 17, 2008 and a hearing is currently scheduled for June 2, 2008.

 

We are a nominal defendant in a shareholder derivative action pending in the Court of Chancery of the state of Delaware, styled Sherwood v. Tyson, et. al., filed on March 20, 2007. This complaint also purports to assert derivative claims on the Company’s behalf for breach of fiduciary duties, gross mismanagement and waste, constructive fraud and unjust enrichment related to the alleged backdating of employee stock options. The plaintiff seeks, among other things, damages, an accounting, disgorgement, rescission and/or repricing of stock options, and imposition of a constructive trust for the benefit of the Company on amounts by which the defendants were unjustly enriched. The plaintiff has agreed to a stay pending resolution of the Pronko action in California.

 

Argentina Antitrust Matter:  In July 2004, we were advised that the Argentine Antitrust Agency had issued a notice unfavorable to us in a proceeding against our Argentine subsidiary. The proceeding involves allegations that the subsidiary in Argentina abused a dominant market position in 1999 by increasing its price on Mestinon in Argentina and not supplying the market for approximately two months. The subsidiary filed documents with the agency offering an explanation justifying its actions, but the agency has now rejected the explanation. The agency is collecting evidence prior to issuing a new decision. Argentinean law permits a fine to be levied of up to $5,000,000 plus 20% of profits realized due to the alleged wrongful conduct. Based upon the size of the transactions alleged to have violated the law, we do not expect this matter to draw the maximum penalty.

 

Permax Product Liability Cases:  On February 8, 2007, we were served a complaint in a case captioned Kathleen M. O’Connor v. Eli Lilly & Company, Valeant Pharmaceuticals International, Amarin Corporation plc, Amarin Pharmaceuticals, Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences, Inc., Case No. 07 L 47 in the Circuit Court of the 17th Judicial Circuit, Winnebago County, Illinois. This case, which has been removed to federal court in the Northern District of Illinois, alleges that the use of Permax for restless leg syndrome caused the plaintiff to have valvular heart disease, and as a result, she suffered damages, including extensive pain and suffering, emotional distress and mental anguish. On February 14, 2008, Valeant filed its motion for summary judgment, arguing that plaintiff did not use Permax after February 25, 2004, when Valeant acquired the right to market and sell Permax in the United States. On April 23, 2008, we were served a complaint in a case captioned Barbara M. Shows v. Eli Lilly and Company, Elan Corporation, PLC, Amarin Corporation, PLC, and Valeant Pharmaceuticals International, Case No. 2008-24P in the Circuit Court of Jefferson Davis County, Mississippi. We are in the process of reviewing this matter. Eli Lilly, holder of the right granted by the FDA to market and sell Permax in the United States, which right was licensed to Amarin and the source of the manufactured product, has also been named in the suits. Under an agreement between Valeant and Eli Lilly, Eli Lilly will bear a portion of the liability, if any, associated with these claims. Product liability insurance exists with respect to these claims. Although it is expected that the insurance proceeds will be sufficient to cover any material liability which might arise from these claims, there can be no assurance that defending against any future similar claims and any resulting settlements or judgments will not, individually or in the aggregate, have a material adverse affect on our consolidated financial position, results of operation or liquidity.

 

Former ICN Yugoslavia Employees:  In December 2003, sixteen former employees of ICN Yugoslavia filed a complaint in state court in Orange County, California. Plaintiffs allege that we breached a promise by Milan Panic, who allegedly offered plaintiffs full pay and benefits if they boycotted the management installed by the Yugoslavian government following its takeover of ICN Yugoslavia. Plaintiffs’ initial complaint and first amended complaint were both dismissed by the judge in March and October 2004, respectively. However, plaintiffs appealed and the Court of Appeals reversed the trial court’s dismissal. Plaintiffs filed their second amended complaint in January 2006, alleging only unjust enrichment and constructive fraud. The parties subsequently agreed to submit this matter to binding arbitration. On December 28, 2007, the arbitrator ruled in favor of Valeant on key threshold legal issues. A final order in favor of Valeant was entered on March 27, 2008.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

Alfa Wasserman:  On December 29, 2005, Alfa Wassermann (“Alfa”) filed suit against our Spanish subsidiary in the Commercial Court of Barcelona, Spain, alleging that our Calcitonina Hubber Nasal 200 UI Monodosis product infringes Alfa’s European patent EP 363.876 (ES 2.053.905) and demanded that we cease selling our product in the Spanish market and pay damages for lost profits caused by competition in the amount of approximately 9 million Euros. We filed a successful counter-claim; however, Alfa has filed an appeal. The Court of Appeals held a hearing in February 2008 and we are awaiting a decision.

 

Spear Pharmaceuticals, Inc.:  On December 17, 2007, Spear Pharmaceuticals, Inc. and Spear Dermatology Products, Inc. filed a complaint in federal court for the District of Delaware, Case No. 07-821, against Valeant and investment firm William Blair & Company, LLC. Plaintiffs allege that while William Blair was engaged in connection with the possible sale of plaintiffs’ generic tretinoin business, plaintiffs disclosed to William Blair the development of generic Efudex in their product pipeline. Plaintiffs further allege that William Blair, while under confidentiality obligations to plaintiffs, shared such information with Valeant and that Valeant then filed a Citizen Petition with the FDA requesting that any abbreviated new drug application for generic Efudex include a study on superficial basal cell carcinoma. Arguing that Valeant’s Citizen Petition caused the FDA to delay approval of their generic Efudex, plaintiffs seek damages for Valeant’s alleged breach of contract, trade secret misappropriation and unjust enrichment, in addition to other causes of action against William Blair. We believe this case is without merit and are vigorously defending ourselves in this matter.

 

On April 11, 2008, the Food and Drug Administration (FDA) approved an Abbreviated New Drug Application (“ANDA”) for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals. On April 11, 2008, the FDA also responded to our Citizen Petition that was filed on December 21, 2004 and denied our request that the FDA refrain from approving any ANDA for a generic version of Efudex unless the application contains data from an adequately designed comparative clinical study conducted in patients with superficial basal cell carcinoma. On April 25, 2008, Valeant filed an application for a temporary restraining order (TRO) against Michael O. Leavitt and Andrew C. Von Eschenbach, in their official capacities at the FDA, in the United States District Court seeking to suspend the FDA’s approval of Spear’s ANDA. On May 1, 2008, the Court granted the FDA’s request to stay proceedings on Valeant’s application for a TRO until May 14, 2008. Spear Pharmaceuticals has agreed to suspend marketing, sales and shipment activities for the duration of the stay.

 

Other:  We are a party to other pending lawsuits and subject to a number of threatened lawsuits. While the ultimate outcome of pending and threatened lawsuits or pending violations cannot be predicted with certainty, and an unfavorable outcome could have a negative impact on us, at this time in the opinion of management, the ultimate resolution of these matters will not have a material effect on our consolidated financial position, results of operations or liquidity.

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

 

The following table sets forth the amounts of our segment revenues and operating income for the three months ended March 31, 2008 and 2007 (in thousands):

 

 

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

 

The following table sets forth our total assets by segment as of March 31, 2008 and December 31, 2007 (in thousands):

 

 

The following table sets forth our long-term assets by segment as of March 31, 2008 and December 31, 2007 (in thousands):

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the largest of our product lines by therapeutic class based on sales for the three months ended March 31, 2008 and 2007 (in thousands):

 

 

VALEANT PHARMACEUTICALS INTERNATIONAL

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

 

During the three months ended March 31, 2008 one customer accounted for more than 10% of consolidated product sales. During this period, sales to McKesson Corporation and its affiliates were $29,828,000 in the United States, Canada, and Mexico, representing 16% of our consolidated product sales.

 

 

We report the royalties received from the sale of ribavirin by Schering-Plough separately from our specialty pharmaceuticals product sales revenue. In 2007, we began presenting these royalty revenues within a new category of revenues, “alliance revenue.” The following table provides the details of our alliance revenue in the three months ended March 31, 2008 and 2007 (in thousands):

 

 

The licensing payment of $19,200,000 was received from Schering-Plough as the initial payment to us in the licensing of pradefovir. Alliance revenue for the three months ended March 31, 2007 also included a $50,000 payment from an unrelated third party for a license to certain intellectual property assets.

 

Overview

 

We are a multinational pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products.

 

Although historically we have focused most of our efforts on neurology, dermatology, and infectious disease, our prescription products also treat, among other things, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. Our products are sold through three pharmaceutical segments comprising: North America, International (Latin America and Australasia) and EMEA (Europe, Middle East and Africa). In addition, we receive alliance revenue in the form of royalties from the sale of ribavirin by Schering-Plough. We expect that this royalty revenue will decline significantly in 2009 in that royalty payments from Schering-Plough continue for European sales only until the ten-year anniversary of the launch of the product, which varied by country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

 

Company Strategy and Restructuring

 

In October 2007, our board of directors initiated a strategic review (the “2008 Strategic Review”) of our business direction, geographic and commercial operations, product and business portfolio, growth opportunities and acquisition strategy. On March 26, 2008, our board of directors approved a new strategic plan for our company. The key elements of this strategy include the following:

 

Focus the business.  We are restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Mexico, Canada, Brazil and Australia. We are pursuing plans to divest our operations in markets outside of these core geographic areas, through sales of subsidiaries, assets, or other strategic alternatives.

 

Maximize the pipeline.  We expect to find strategic partners to help us optimize the value of our two late-stage development projects, retigabine, a potential treatment for partial onset seizures in patients with epilepsy and for neuropathic pain, and taribavirin, a potential treatment for hepatitis C. We are identifying potential opportunities for taribavirin in niche indications where there are significant unmet medical needs and expect to utilize a partner if we pursue a large phase III clinical development program in hepatitis C.

 

Rebase and grow.  With our focus on the therapeutic areas of neurology and dermatology in our core geographies, we plan to invest in our business and pursue selective acquisitions in order to deliver returns to our shareholders. Our strategic plan is designed to streamline our business, reduce expenses and align our infrastructure with the reduced scale of our operations.

 

Prior to the start of the 2008 Strategic Review, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and divested or discontinued certain non-strategic products as a result. We sold our rights to Infergen to Three Rivers Pharmaceuticals, LLC on January 14, 2008. In 2007, we also sold product rights to Reptilase, Solcoseryl in Japan, our opthalmic business in Holland, and certain other products. On March 3, 2008, we sold certain of our subsidiaries and product rights in Asia to Invida Pharmaceutical Holdings Pte. Ltd. in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan.

 

On April 11, 2008, the Food and Drug Administration (FDA) approved an Abbreviated New Drug Application (“ANDA”) for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals. On April 11, 2008, the FDA also responded to our Citizen Petition that was filed on December 21, 2004 and denied our request that the FDA refrain from approving any ANDA for a generic version of Efudex unless the application contains data from an adequately designed comparative clinical study conducted in patients with superficial basal cell carcinoma. On April 25, 2008, Valeant filed an application for a temporary restraining order (TRO) against Michael O. Leavitt and Andrew C. Von Eschenbach, in their official capacities at the FDA, in the United States District Court seeking to suspend the FDA’s approval of Spear’s ANDA. On May 1, 2008, the Court granted the FDA’s request to stay proceedings on Valeant’s application for a TRO until May 14, 2008. Spear Pharmaceuticals has agreed to suspend marketing, sales and

shipment activities for the duration of the stay. If a competitor is allowed to launch a generic version of our Efudex product, our sales in the U.S. of Efudex will significantly decline.

 

Specialty Pharmaceuticals

 

Product sales from our pharmaceutical segments accounted for 93% of our total revenue from continuing operations for the three months ended March 31, 2008, compared with 82% for the corresponding period in 2007, and increased $13,980,000 (8%) for the three months ended March 31, 2008 over the same period in 2007. The 8% increase in specialty pharmaceutical sales for the three months ended March 31, 2008 was due to an 8% benefit from foreign exchange fluctuations and a 1% price increase, partly offset by a 1% decline in volume.

 

Clinical Development

 

We seek to develop and commercialize innovative products for the treatment of significant unmet medical needs, principally in the areas of neurology and infectious disease. Research and development expenses were $29,392,000 for the three months ended March 31, 2008, compared to $20,990,000 for the same period in 2007, reflecting an increase of $8,402,000 (40%). This increase was largely driven by the expenditures for the retigabine clinical development program in the period.

 

Alliance Revenues

 

Alliance revenue for the three months ended March 31, 2008 consisted exclusively of $12,773,000 of ribavirin royalty revenue from Schering-Plough. Alliance revenue for the three months ended March 31, 2007 comprised the $19,200,000 pradefovir licensing payment from Schering-Plough, $17,220,000 of ribavirin royalties, and a separate licensing payment of $50,000. Ribavirin royalty revenues decreased $4,447,000 (26%) and accounted for 7% of our total revenues from continuing operations for the three months ended March 31, 2008 as compared to 8% in the similar three-month period in 2007. The decrease in ribavirin royalties reflects Schering-Plough’s market share losses in ribavirin sales and Roche’s discontinuation of royalty payments to us in June 2007. We expect ribavirin royalties to continue to decline in 2008. The royalty will decline significantly in 2009 in that royalty payments from Schering-Plough continue for European sales only until the ten-year anniversary of the launch of the product, which varied by country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

 

Results of Operations

 

As part of the 2008 Strategic Review, we announced on March 27, 2008 that we would focus on the pharmaceutical markets in the United States, Mexico, Canada, Brazil, and Australia and intend to stop organizing our company by geographic regions. In the three months ended March 31, 2008, however, we were still operating in our three reportable pharmaceutical segments, comprising pharmaceuticals operations in North America; International; and Europe, Middle East, and Africa. In addition, we have a research and development division. Certain financial information for our business segments is set forth below. This discussion of our results of operations should be read in conjunction with our consolidated condensed financial statements included elsewhere in this quarterly report. For additional financial information by business segment, see Note 11 of notes to consolidated condensed financial statements included elsewhere in this quarterly report.

The following tables compare revenues by reportable segments and operating expenses for the three months ended March 31, 2008 and 2007 (in thousands, except percentages):

 

 

NM — Not Meaningful

 

In the North America pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $72,276,000, compared to $62,599,000 for the same period in 2007, representing an increase of $9,677,000 (15%). The region reported increases in sales of Efudex, Cesamet, and Zelapar, which were partly offset by decreases in sales in the first quarter of Kinerase and Oxsoralen-Ultra. Sales of Efudex in the three months ended March 31, 2007 were low because of the pull-through of inventory from our December 2006 launch of an authorized generic version of Efudex in the U.S. The reported growth of Cesamet reflects strong demand for Cesamet in Canada. Product sales in the North America region were 40% of total product sales in the three months ended March 31, 2008, compared with 37% in the three months ended March 31, 2007. The North America sales increase of 15% resulted from a volume increase of 7%, a price increase of 5%, and a 3% benefit from currency fluctuations in Canada.

 

In the International pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $29,151,000 compared to $35,275,000 for the same period in 2007, a decrease of $6,124,000 (17%). Our sales to our two largest wholesalers in Mexico continue to be impacted by their reaction to the changes we made in our distribution channel in 2006. In addition, the decline in the International segment relates to our sale of certain subsidiaries and business operations in Asia to Invida on March 3, 2008. Our sales in the operations sold to Invida were $4,140,000 in the three months ended March 31, 2007, compared with $1,059,000 in the two months ended February 29, 2008. The International sales decrease of 17% resulted from a 21% decrease in volume and a 1% price reduction, partially offset by a 5% benefit from currency fluctuations.

 

In the EMEA pharmaceuticals segment, revenues for the three months ended March 31, 2008 were $80,486,000, compared to $70,059,000 for the same period in 2007, representing an increase of $10,427,000 (15%). The region reported increases in sales of Solcoseryl, Mestinon, and Bisocard, which were partly offset by declines in sales of Kinerase, Protamin, and Efudex. The EMEA sales increase resulted from a 15% benefit from currency fluctuations and a 1% increase in volume, partly offset by a 1% decline in price.

Gross Profit Margin (excluding amortization):  Gross profit margin on product sales was 70% for the first quarter of 2008, compared with 72% for the same period in 2007. The decrease in gross profit margin primarily reflects increased inventory obsolescence charges.

 

Selling Expenses:  Selling expenses were $63,790,000 for the three months ended March 31, 2008, compared to $58,440,000 for the same period in 2007. As a percent of product sales, selling expenses were 35% for the three months ended March 31, 2008 and March 31, 2007. The increase in selling expenses results primarily from currency impacts as well as increased promotional activity in support of branded generic products in Central Europe, Kinerase and neurology products in the United States.

 

General and Administrative Expenses:  General and administrative expenses were $26,106,000 for the three months ended March 31, 2008, compared to $26,115,000 for the same period in 2007, a decrease of $9,000 (0%). As a percent of product sales, general and administrative expenses were 14% for the three months ended March 31, 2008, compared to 16% for the same period in 2007.

 

Included in general and administrative expenses in the three months ended March 31, 2007 was a $3,800,000 expense for the arbitration loss on the indemnification claim we had against the former shareholders of Xcel Pharmaceuticals associated with sales of Xcel products prior to our acquisition of the company. This was partially offset by a $2,200,000 gain on the sale of an ophthalmic business in Europe.

 

Research and Development:  Research and development expenses were $29,392,000 for the three months ended March 31, 2008, compared to $20,990,000 for the same period in 2007, an increase of $8,402,000 (40%). This increase was largely driven by the expenditures for the retigabine clinical development program in the period.

 

Restructuring Charges:

 

2008 Restructuring

 

In October 2007, our board of directors initiated a strategic review of our business direction, geographic operations, product portfolio, growth opportunities and acquisition strategy. As announced on March 27, 2008, we have completed this strategic review and announced a strategic plan which will include a restructuring program (the “2008 Restructuring”). The 2008 Restructuring is expected to reduce our geographic footprint and product focus by restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Mexico, Canada, Brazil and Australia. We are pursuing plans to divest our operations in markets outside of these core geographic areas through sales of subsidiaries, assets or other strategic alternatives, to seek partners for taribavirin and retigabine and to make selective acquisitions.

 

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell Invida certain Valeant subsidiaries and product rights in Asia, in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with SFAS 144. We received initial proceeds of $37,855,000 and recorded a gain of $36,923,000 in this transaction. We expect to receive additional proceeds in 2008 of approximately $5,585,000 as a purchase price adjustment relating to net asset value.

 

As of March 31, 2008, we classified our subsidiaries in Argentina and Uruguay as “held for sale” in accordance with SFAS 144. We are negotiating the sale of these subsidiaries, which we expect to close in 2008. In the three months ended March 31, 2008, we recorded an impairment charge of $7,853,000 related to this sale.

 

The net restructuring, asset impairments and dispositions benefit of $12,664,000 in the three months ended March 31, 2008 resulted from the gain of $36,923,000 in the transaction with Invida, offset in part by restructuring charges of $24,259,000. Restructuring charges incurred in the three months ended March 31, 2008 included severance costs of $6,742,000, contract cancellation and other cash costs of $3,536,000, cash charges from the Invida transaction of $1,350,000, a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4,778,000 and an impairment charge of $7,853,000 related to the planned sale of our subsidiaries in Argentina and Uruguay. The severance charges recorded in the 2008 Restructuring as of

March 31, 2008 were primarily for our former chief executive officer and six other executives. The charges taken in 2007 for this 2008 Restructuring included $957,000 for executive severances, $4,677,000 for professional service expenses and $3,967,000 for contract termination and transaction costs associated with the sale of our Asia businesses to Invida.

 

As of the filing date of this quarterly report on Form 10-Q, we are not able to estimate the total restructuring charges that we will incur in the 2008 Restructuring.

 

2006 Restructuring

 

On April 3, 2006, we announced a restructuring program (the “2006 Restructuring”) which was primarily focused on our research and development and manufacturing operations. The objective of the restructuring program as it related to research and development activities was to focus our efforts and expenditures on retigabine and taribavirin, our two late stage projects in development. The restructuring program was designed to rationalize our investments in research and development efforts in line with our financial resources. In December 2006 we sold our HIV and cancer development programs and certain discovery and pre-clinical assets to Ardea Biosciences, Inc. (“Ardea”), with an option for us to reacquire rights to commercialize the HIV program outside of the United States and Canada upon Ardea’s completion of Phase 2b trials. In March 2007, we sold our former headquarters building in Costa Mesa, California, where our former research laboratories were located, for net proceeds of $36,758,000.

 

In the three months ended March 31, 2007, we recorded a charge of $7,238,000 related to the 2006 Restructuring. Severance charges recorded in the three months ended March 31, 2007 for employees whose positions were eliminated in the restructuring totaled $3,781,000. The charge in the three months ended March 31, 2007 included $2,050,000 related to 202 employees at our former manufacturing facility in Humacao, Puerto Rico and $895,000 related to 10 employees in our sales and marketing operations in Spain.

 

The objective of the 2006 Restructuring as it related to manufacturing was to further rationalize our manufacturing operations to reflect the regional nature of our existing products and further reduce our excess capacity after considering the delay in the development of taribavirin. The impairment charges included the charges related to estimated future losses expected upon the disposition of specific assets related to our manufacturing operations in Switzerland and Puerto Rico. We completed the 2006 Restructuring in June 2007 with the sale of our former manufacturing facilities in Humacao, Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals International.

 

The following table summarizes the restructuring costs recorded in the three months ended March 31, 2008 and March 31, 2007 (in thousands):